LCCI International Qualifications

Book-keeping and Accounts

Level 2

Model Answers
Series 4 2008 (2007)

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Book- Keeping and Accounts Level 2
Series 4 2008

How to use this booklet

Model Answers have been developed by EDI to offer additional information and guidance to Centres,
teachers and candidates as they prepare for LCCI International Qualifications. The contents of this
booklet are divided into 3 elements:

(1) Questions – reproduced from the printed examination paper

(2) Model Answers – summary of the main points that the Chief Examiner expected to
see in the answers to each question in the examination paper,
plus a fully worked example or sample answer (where applicable)

(3) Helpful Hints – where appropriate, additional guidance relating to individual

questions or to examination technique

Teachers and candidates should find this booklet an invaluable teaching tool and an aid to success.

EDI provides Model Answers to help candidates gain a general understanding of the standard
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accepts that candidates may offer other answers that could be equally valid.

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Page 1 of 13
QUESTION 1

Peggy values her stock on a monthly basis. Due to staff illness the stocktaking for the month of
September 2007 did not take place until 5 October 2007. The following information is available:

(i) The records at 31 August 2007 showed stock valued at cost of £170,400.

(ii) Sales during September 2007 were £127,800. Sales include a mark up on cost of 25%.

(iii) A quantity of stock valued at sale price, £7,200, on 31 August 2007 had been damaged. This
could now only be sold at half of cost price.

(iv) A stock sheet at 31 August 2007 had been over-added by £2,550.

(v) Purchases during September 2007 were £89,400 at cost.

(vi) Returns by customers during September 2007 were £2,175 at selling price.

(vii) Included in the September sales figure were goods on a sale or return basis at sale price, £1,950.
The customer had not stated an intention to buy, or return the goods, at 5 October 2007.

(viii) Returns to suppliers during September 2007 were £4,050 at cost price.

REQUIRED

(a) Calculate the value of stock at 30 September 2007. Commence with the value of stock £170,400
at 31 August 2007.
(15 marks)

(b) Prepare Peggy’s Trading Account for the month ended 30 September 2007.
(10 marks)

(Total 25 marks)

2007/4/08/MA Page 2 of 13
MODEL ANSWER TO QUESTION 1

(a)
£ £ £
Stock at 1 September 2007 170,400
Add: Purchases 89,400

Sales returns 2,175

1.25 1,740

Sale or return 1,950

1.25 1,560 92,700
263,100

Less: Sales 127,800 102,240

1.25

Goods at NRV 7,200

1.25

= 5,760 x 50% 2,880

Stock sheet adjustment 2,550

Purchases returns 4,050 111,720

Stock at 30 September 2007 151,380

(b) Peggy
Trading Account for the month ended 30 September 2007

£ £ £
Sales (127,800 – 1,950) 125,850
Less: Returns 2,175
123,675
Cost of Sales:
Stock at 1 September 2007
(170,400 – 2,550) 167,850
Add: Purchases 89,400
Less: Returns 4,050 85,350
253,200
Less: Stock at 30 September 2007 151,380 101,820
Gross Profit 21,855

2007/4/08/MA Page 3 of 13
QUESTION 2

XYZ plc has an authorised share capital of 300,000 10% preference shares of £2 each and 450,000
ordinary shares of £2 each.

The following are the balances in the books at 31 October 2007:

£
Preference shares fully paid 450,000
Ordinary shares fully paid 600,000
Stock 499,200
Provision for doubtful debts at 31 October 2006 1,000
Motor vans at cost 180,000
Furniture and equipment at cost 150,000
Debtors 236,000
Insurance prepaid 10,000
Bank overdraft 6,000
Profit and loss account balance at 31 October 2006 114,000
Provision for depreciation on motor vans at 31 October 2006 42,000
Provision for depreciation on furniture and equipment at 31 October 2006 37,500
10% Debentures (repayable 2021) 150,000
Creditors 186,000
Cash 5,000
Premises 645,000

Additional information:

No entries have been made in the books for the following:

(1) motor vans are depreciated at 10% per annum on cost

(2) furniture and equipment was valued at £105,000 on 31 October 2007
(3) provision for doubtful debts was increased by £2,200 at 31 October 2007
(4) interest on debentures is due but unpaid

After adjusting for items 1 – 4 above, the net profit before appropriation was £96,000.

The directors are proposing:

(i) the preference share dividend is to be paid in full

(ii) a dividend on the ordinary shares of £0.20 per share.

REQUIRED

Prepare a Balance Sheet at 31 October 2007. Show clearly the value of net current assets and
total shareholders' funds.

(Total 25 marks)

2007/4/08/MA Page 4 of 13
MODEL ANSWER TO QUESTION 2

XYZ plc
Balance Sheet at 31 October 2007

Fixed Assets Cost Accumulated Depreciation Net

£ £ £ £
Premises 645,000 - 645,000
Motor vans 180,000 60,000 (W1) 120,000
Furniture and Equipment 150,000 45,000 (W2) 105,000
975,000 105,000 870,000

Current Assets
Stock 499,200
Debtors 236,000
Less: Provision for
doubtful debts 3,200 232,800
Cash 5,000
Insurance prepaid 10,000 747,000

Less: Creditors due within one year

Creditors 186,000
Bank overdraft 6,000
Preference dividend 45,000
Proposed ordinary dividend 60,000
Debenture interest due (W3) 15,000
312,000
Net current assets 435,000
1,305,000

Less: Creditors due after one year

10% Debentures (repayable 2021) 150,000
1,155,000

Authorised Share Capital

300,000 10% preference shares of £2 each 600,000
450,000 ordinary shares of £2 each 900,000
1,500,000

Issued Share Capital

225,000 10% preference shares of £2 each fully paid 450,000
300,000 ordinary shares of £2 each fully paid 600,000
1,050,000

Reserves
Profit and Loss account (W4) 105,000 ________
Shareholders funds 1,155,000

2007/4/08/MA Page 5 of 13
MODEL ANSWER TO QUESTION 2 CONTINUED

Workings
£
1 Provision at 31 October 2006 42,000
Add: £180,000 x 10% 18,000
60,000

2 Provision at 31 October 2006 37,500

Add: (£150,000 − £37,500) − £ 105,000 7,500
45,000

3 £150,000 x 10% = £15,000

4 Balance at 31 October 2006 114,000

Add: Net Profit for year ending 31 October 2007 96,000
210,000
Less: Preference Dividend 45,000
Proposed Ordinary Dividend 60,000 105,000
Balance at 31 October 2007 105,000

2007/4/08/MA Page 6 of 13
QUESTION 3

The following is a summary of B Ball’s bank account for the year ended 31 December 2007:

£ £
Balance at 1 January 2007 810 Payments to creditors for goods 58,974
Receipts from debtors 75,872 General expenses 750
Balance at 31 December 2007 1,404 Rent 3,500
Rates 1,780
Drawings 13,082
78,086 78,086

All the business takings have been paid into the bank with the exception of £19,000. From this, Ball
has paid wages of £10,684, drawings of £2,328 and has purchased goods totalling £5,988.

Additional information at 31 December:

2006 2007
£ £
Debtors 17,802 17,248
Trade Creditors 11,748 14,778
Rates prepaid 420 450
Rent accrued 300 -
Fixtures at valuation 5,500 4,500
Stock 27,724 30,288

No fixtures were bought or sold during 2007.

REQUIRED

Prepare the following for B Ball:

(a) Trading and Profit & Loss account for the year ended 31 December 2007. (17 marks)

(b) Balance Sheet at 31 December 2007. (8 marks)

All workings must be shown.

(Total 25 marks)

2007/4/08/MA Page 7 of 13
MODEL ANSWER TO QUESTION 3

(a) B Ball
Trading and Profit & Loss account for the year ended 31 December 2007

£ £
Sales 94,318 [W1]
Less Cost of goods sold
Opening stock 27,724
Add Purchases 67,992 [W2]
95,716
Less Closing stock 30,288 65,428
Gross profit 28,890
Less Expenses
Wages 10,684
Rent (3,500 - 300) 3,200
Rates (1,780 + 420 - 450) 1,750
General expenses 750
Depreciation 1,000 17,384
Net profit 11,506

[1] Workings
Sales Ledger Control Account

£ £
Balance b/d 17,802 Bank 75,872
Sales 75,318 Balance c/d 17,248
93,120 93,120

Cash Sales 19,000 + Credit Sales 75,318 = 94,318

[2] Workings
Purchases Ledger Control Account

£ £
Bank 58,974 Balance b/d 11,748
Balance c/d 14,778 Purchases 62,004
73,752 73,752

Cash Purchases 5,988 + Credit Purchases 62,004 = 67,992

2007/4/08/MA Page 8 of 13
MODEL ANSWER TO QUESTION 3 CONTINUED

(b) Balance Sheet at 31 December 2007

£ £ £
Fixed Assets
Fixtures at valuation 5,500
Less Depreciation 1,000 4,500

Current Assets
Stock 30,288
Debtors 17,248
Prepayments 450
47,986
Current Liabilities
Trade creditors 14,778
Bank overdraft 1,404 16,182

Net Current Assets 31,804

36,304
Capital
Balance at 1 January 2007 40,208 [W3]
Add Net profit 11,506
51,714
Less Drawings (2,328 + 13,082) 15,410
36,304

[3] Workings
Assets Liabilities
£ £
Bank 810 Creditors 11,748
Stock 27,724 Rent accrued 300
Debtors 17,802 12,048
Rates prepaid 420 Capital 40,208
Fixtures 5,500
52,256 52,256

2007/4/08/MA Page 9 of 13
QUESTION 4

Bill Jones has drawn up the following trial balance at 31 March 2008. It contains a number of errors.

Trial Balance at 31 March 2008

Dr Cr
£ £
Purchases 290,000
Sales 450,000
Capital 94,300
Drawings 43,000
Carriage inwards 4,000
Carriage outwards 3,000
Discounts allowed 2,300
Discounts received 1,500
Office equipment at cost 24,000
Provision for depreciation office equipment 4,800
Fixtures & fittings at cost 13,000
Provision for depreciation fixtures & fittings 2,600
Debtors 50,000
Creditors 40,000
Sales returns 2,000
Purchases returns 1,000
Insurance 8,000
Stock at 1 April 2007 30,000
Stock at 31 March 2008 26,000
Wages 40,000
Bank overdraft 12,000
Sundry expenses 14,000
Cash 1,900
739,400 418,000

REQUIRED

(a) Prepare an amended Trial Balance at 31 March 2008. Clearly show the balance to be transferred
to the Suspense A/c.
(15 marks)
After preparing the Trial Balance, Bill discovered the following errors:

(i) Light & heat expenses of £2,500 have been correctly entered in the Cash Book but no other entry
had been made.

(ii) An entry of £1,000 for insurance has been entered on the credit side of the Insurance Account.

(iii) A credit sale to D Farrow of £300 has been debited to the account of D Marlow.

(iv) Fixtures & fittings of £77,500, purchased in January 2008, have been entered as £7,500 in the
Fixtures & Fittings Account but correctly entered in the Cash Book. No depreciation is charged in
the year of purchase.

(v) A balance on the Rent Payable Account of £6,500 has not been entered on the Trial Balance.

REQUIRED

(b) Prepare a Suspense account showing the necessary corrections to be made. (6 marks)

(c) State FOUR types of error that will not be identified by the preparation of a Trial Balance.
(4 marks)

(Total 25 marks)

2007/4/08/MA Page 10 of 13
MODEL ANSWER TO QUESTION 4

(a) Trial Balance at 31 March 2008

Dr Cr
£ £
Purchases 290,000
Sales 450,000
Capital 94,300
Drawings 43,000
Carriage inwards 4,000
Carriage outwards 3,000
Discounts allowed 2,300
Discounts received 1,500
Office equipment at cost 24,000
Provision for depreciation office equipment 4,800
Fixtures & fittings at cost 13,000
Provision for depreciation fixtures and fittings 2,600
Debtors 50,000
Creditors 40,000
Sales returns 2,000
Purchases returns 1,000
Insurance 8,000
Stock at 1 April 2007 30,000
Wages 40,000
Bank overdraft 12,000
Sundry expenses 14,000
Cash 1,900
Suspense 81,000
606,200 606,200

(b) Suspense Account

Bal b/d 81,000 Light & heat 2,500

Insurance 2,000
Fixtures & fittings 70,000
Rent payable 6,500
81,000 81,000

(c) Errors:
Commission
Omission
Principle
Compensating
Original
Reversal

2007/4/08/MA Page 11 of 13
QUESTION 5

The accounts of Jackson Ltd, for the years 2007 and 2008, are summarised below:

Trading and Profit & Loss Account for the year ended 30 November

2007 2008
£000 £000
Sales 800 1,120
Less
Cost of sales
Opening stock 140 70
Purchases 530 870
670 940
Less Closing Stock 70 100
600 840
Gross profit 200 280
Less
Administration expenses 154 186
Debenture interest 4 16
Net profit 42 78

Balance Sheets at 30 November

2007 2008 2007 2008

£000 £000 £000 £000
Fixed assets at NBV 490 560 Capital and Reserves
Ordinary share capital 400 400
Profit and loss 120 164

Current Assets Liabilities due after 1 year

Stock 70 100 8% Debentures. 50 200
Debtor’s 110 132
Bank - 20
Liabilities due within 1 year
Creditors 60 48
Bank 40 0
670 812 670 812

REQUIRED

(a) Calculate the following ratios for 2007 and 2008 to the nearest TWO decimal places:

(i) Gross profit as % of Sales

(ii) Net profit (before interest) as % of Sales
(iii) Stock turnover
(iv) Current /Working Capital
(v) Liquidity/Acid test
(vi) Return on Capital Employed before interest
(vii) Debtor’s collection period
(viii) Creditor’s settlement period
(ix) Sales to capital employed. (18 marks)

(b) State one benefit to a business in calculating liquidity ratios. (2 marks)

(c) State in which year Jackson’s Ltd performed the best, giving two reasons to support your answer.

(5 marks)

(Total 25 marks)

2007/4/08/MA Page 12 of 13
MODEL ANSWER TO QUESTION 5

(a) 2007 2008

(i) 200 x 100 = 25% ... 280 x 100 = 25%
800 1,120

(ii) 46 x 100 = 5.75% 94 x 100 = 8.39%

800 1,120

(iii) 600 = 5.71 times 840 = 9.88 times

(140 + 70) / 2 (70 + 100) / 2
OR OR
9.11 weeks 5.26 weeks

(iv) 180 = 1.8:1 252 = 5.25:1

100 48

(v) 110 = 1:1 152 = 3.17:1

100 48

(vi) 46 x 100 = 8.07% 94 x 100 = 12.30%

570 764

(vii) 110 x 365 = 50.19 days 132 x 365 = 43.02 days

800 1,120

(viii) 60 x 365 = 41.32 days 48 x 365 = 20.14 days

530 870

(ix) 800 x 100 = 140.35% 1,120 x 100 = 146.60%

570 764

(b) Determines if the business is able to meet its short-term obligations as they fall due

(c) Performed better in 2008 because:

Accept any two of the following examples:

Increased net profit as % of sales

Stock turned over more frequently
Increased return on capital employed
Debtors’ paid their debts more quickly
Paid the creditors more quickly
Greater sales generated to capital employed.

2007/4/08/MA Page 13 of 13
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2007/4/08/MA Page 13 of 13